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Ladies and gentlemen, thank you for standing by, and welcome to the Sierra Metals Q3 2020 Consolidated Financial Results call. [Operator Instructions] I would now like to turn the call over to your speaker today, Mike McAllister, Vice President of Investor Relations. Please go ahead.
Thank you, operator, and good morning, everyone. Welcome to Sierra Metals Q3 2020 Results Conference Call. On today's call, we are joined by Luis Marchese, our CEO; Ed Guimaraes, our CFO.Today's call will be followed by a question-and-answer period. The accompanying presentation for today's call is available for download both through the webcast and from the company's website at sierrametals.com.This morning's press release, the financial statements and the management discussion and analysis are also posted on the company website. Before I turn the call over to Luis, I would like to indicate that this earnings call contains forward-looking information that is based on the company's current expectations, estimates and beliefs. This forward-looking information is subject to a number of risks, uncertainties and other factors. Actual results could differ materially from our conclusions, forecasts or projections as reflected in the forward-looking information.Additional information about the material factors that could cause actual results to differ materially from the conclusion, forecast or projection in the forward-looking information and material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information is contained in the company's annual information form, which is publicly available on SEDAR or EDGAR via Form 40-F or on the company's website.Please note that all dollar amounts mentioned on the call today are in U.S. dollars, unless, otherwise, noted.With that, I would now like to turn the call over to Luis Marchese, CEO of Sierra Metals.
Thanks, Mike. Before I speak about our Q3 highlights and insights, I'd like to take a quick moment to update you on the most recent COVID-19 developments in Mexico group. Turning to Slide 4. At the beginning of June, the Peruvian and Mexican governments allowed for the resumption of full mining and mining-related activities. The company recalled employees of the Yauricocha and Bolivar mines. Also, on July 28, once the process could be put in place at Cusi to ensure working and community safety, we also recalled employees there as well to start operations. We are proceeding cautiously and adhering to a strict health protocols to protect our employees and the communities in which we operate as well as to mitigate the potential for further work stoppages at our mines.We continued to employ a double sense methodology of tested, quarantine and testing again before employees coming of break join the active workers. Also, once at the mine, all employees are continued to be monitored with daily health checks. While this system has served us well, it's not a perfect solution. We still have had some positive cases materializing the workers and have needed to quarantine and send employees for further medical attention. We also needed to remove any employees identified through contact tracing from the workers, until they are medically cleared to continue. I cannot understate the difficult situation due to COVID-19 currently both in Peru and Mexico, as we must continue to be very diligent in our actions. Taking care of the communities where we operate is also very important to us for their safety and their wellbeing. We have worked with the communities and have donated PPE and medical supplies, including a donation to a local fundraising effort near the Yauricocha Mine for the purchase of 2 oxygen production plants. We will continue strengthening our engagement and support to our workers, their families and the local communities in our area of influence at all 3 mines as the situation evolves. I would like to commend our employees and management, who, despite the challenges facing this in the quarter from lower than optimal headcount due to COVID-19, they managed to maintain a high level of productivity. With that, I will now turn the call over to Ed Guimaraes, our CFO, for the financial highlights.
Thanks, Luis. Good morning, everyone. Turning now to Slide 5. The company achieved exceptional results in the third quarter despite managing the implications of COVID-19. We reported record consolidated throughput and record adjusted EBITDA of $37 million as well as $24 million of free cash flow. We also reported strong cash flow and net income, and we finished the quarter with approximately $63 million in cash. These are strong results that have evolved from optimizing operations and expansions ramp up that have provided stronger financial and operational performances, which we expect to continue through the course of this year as well as next year. Our revenue mix by metal continues to be led by copper, followed by silver, which has taken an increasing role with the ramp-up of Cusi. Gold has also seen a continued increase as a percentage of the mix aided by improved production and recovery at Bolivar and supported by higher gold prices. In Q3, we saw an improvement in realized metal prices for copper, silver, gold and zinc. Precious metals have continued to improve in Q3 and remained strong in Q4, and copper continues to strengthen in Q4. Turning to Slide 6. When compared to the same period in 2019, cash costs were down at all mines, which was attributable to lower operating costs, lower sustaining capital and a prudent management of capital expenditures to protect the balance sheet. All-in sustaining costs were also lower at Bolivar and Cusi. However, we did see a 6% increase in the all-in sustaining costs at Yauricocha due to the higher treatment and refining costs, higher sustaining capital and lower copper equivalent payable pounds due to lower head grades and recoveries for all metals. Except zinc as less ore was contributed from the high-grade narrow orebodies, otherwise known as Cuerpos Chicos. We also realized improved favorable foreign exchange during the quarter as well as year-to-date. I will now turn the call back over to our CEO, Luis Marchese.
Thanks, Ed. Turning to Slide 7. And looking ahead in '20, we still see a strong growth for the company as operations return to full capacity, and we are optimistic that with improved operating efficiencies and potential higher metal prices, we will see a strong fourth quarter and finish for 2020. At Yauricocha, we have the flexibility to recover lost production from the COVID-19 shutdowns. We are ramping up our exploration and infrastructure projects, which have been on hold due to COVID-19. Furthermore, we also continue to seek the required permits to increase Yauricocha's throughput to a 3,600 tonnes per day level for next year. We are also excited to see Bolivar and Cusi ramping up to the targeted capacities for 5,000 and 1,200 tonnes per day, respectively. Similar to Yauricocha, we are ramping our exploration and infrastructure and mine improvements, including expanded drilling facilities at both mines as well as an underground connection panel that will connect the mines with the plant of Bolivar, improving efficiencies and reducing haulage costs. At Cusi, we continue to explore in the Northeast drilling system, which has provided us with high silver grade. We continue to drill on this highly prospective target. And due to its close proximity to existing operations, we have been able to bring ore from this area into the mine plant at an accelerated pace. I'm also pleased to announce the very positive PEA at the Bolivar mine, which highlighted turning of throughput to 10,000 tonnes per day as the best path forward. More complete feasibility study is underway and expected next year. Updated PEAs are also being completed for the Yauricocha and Bolivar mines and are expected to be released shortly, which will highlight the restricted levels going forward based on the sizable mineral resources at the mines. The company has excellent land packages with tremendous resource growth potential to support further organic growth at all mines. The company has also issued revised 2020 adjusted at EBITDA, CapEx and cost guidance. We now anticipate that 2020 adjusted EBITDA will range between $100 million to $105 million. Capital expenditure will range between $40 million to $45 million. The revised guidance assumes no further shutdowns of working stoppages because of the COVID-19 pandemic and is based only on what management expects the company's operation can produce this year. In conclusion, on Slide 8, the company had a very strong quarter despite the adversities we faced from the COVID-19 pandemic. And we're still able to emerge with a stronger balance sheet and cash position. While we continue to operate in a [indiscernible] environment due to COVID-19, we remain optimistic that further cash flow and liquidity improvements are expected as we finish this year as a benefit of improved production and metal prices. The company has made the necessary capital investments on infrastructure improvements to grow production and improved costs, and we are now reaping the rewards. We remain committed to the proven and sustainable growth of the company. And more importantly, to improve the per share value of benefiting our shareholders. With that, I will now turn the call back to Mike.
Thanks, Luis. That ends the presentation portion of this call. We would now like to open up the call to questions from participants. Operator, could you please open the line.
[Operator Instructions] Your first question comes from Mark Reichman from NOBLE Capital Markets.
Kudos on the strong operational and financial performance for the quarter. Just had a couple of questions. First is, I was wondering what you see as the key drivers of lower all-in sustaining costs at Yauricocha?
Thank you, Mark. Well, for Yauricocha, we are working in streamlining the operations and embedding the operating efficiencies that we've identified in the last 3 quarters. Actually, given the last 6 months, we've been looking at optimizing our operations due to COVID and that has shown us some opportunities that we are working on. On the other hand, I should say that in this last quarter, we have less headcount than optimal. So actually, we've done less than we should have done in part of the sustaining of the -- what could have been the sustaining capital expenditure. So eventually, we're going to recover the lost ground in the next quarter or so.
And then secondly, you made -- mention in the press release about the exploration at Yauricocha, mentioning the copper and molybdenum porphyry. And then also the actual drilling during the third quarter at Cusi, I was wondering if there was any more you could elaborate on in terms of your plans at Yauricocha? And maybe what you found so far at Cusi in that new zone? I'm taking assay results, probably won't be on a little while, but maybe your preliminary thoughts?
Well, in Yauricocha, we have -- came back to drill, Mark. Because of COVID, we didn't have the ability to do so. So actually, as we speak, we are drilling into the potential copper porphyry area, which have started drilling there. In Cusi, we've been doing infill drilling in the area that you mentioned. And what we find is that we can confirm that there is a silver at the area, and we are pretty optimistic that we're going to find more around.
And your next question will come from Heiko Ihle from H.C. Wainwright.
Hope everybody is safe. Good day in the market today. Obviously, with COVID just you're risking the life a little bit. But talk to me a little bit about treatment and refining costs. I mean, what are you seeing in the market the year in Q4? We're halfway through Q4? And how long are you able to -- able and willing, I guess, to lock in pricing, please?
Hi, Heiko, Thank you. Thanks for the question. Yes. So in terms of TCs/RCs, we're in the process of renewing the contracts as we speak. But we have seen a significant decrease, a decline in the TCs and RCs for zinc and lead, but principally, I think, like, the last year's benchmark was around $300 per tonne and the spot zinc TCs/RCs got down to the low $100s. So a significant increase there. I don't really want to speculate further in terms of the trends, but things have certainly improved on the TC/RC front, when compared to the last 2 years, particularly because of the improvement seen in the zinc.
Fair enough. And I assume I know the answer to this question, but I mean, you don't have a whole lot of delays in regards to getting paid after things leave the door, right?
Yes, that's correct. We get paid around 5 to 7 days.
Okay. So that hasn't changed. No one's come up with excuses to delay that?
No.
Your next question will come from Raphael De Souza from CIBC.
Congratulations on the strong quarter. My first question is regarding your CapEx guidance. I believe you had $52 million before and you're now changing to, call it, a midpoint of $42.5 million. So can you provide us a little bit of color on where you made the changes? And how do you expect to spend, call it, another $20 million in the fourth quarter alone?
Thanks, Raphael, for your question. Yes, in terms of CapEx and the deferrals that we're seeing, one main one -- primary one was Yauricocha shaft. Most of that expenditure is being pushed forward, if you will, or deferred into 2021. And what was the second part of your question? Sorry, Raphael?
Yes. So I believe you still to have about $20 million to get to that midpoint of guidance to be spent in the fourth quarter? So just like a little bit of color on your plans for that.
Yes. We're -- we have the cash, and we have the wherewithal and we have been investing, spending aggressively on our CapEx projects. And we feel comfortable being in that range.
Okay. Okay. And so that's another -- not a very strong quarter in terms of cash flow generation. Do you -- maybe can you please provide us any update on your previous plans to distribute cash to shareholders?
So as we all know, the return of capital, the distribution, if you will, of cash to shareholders was put on hold. And that was put on hold because of COVID. And we still are very much in COVID. This is something that the Board is considering in terms of -- it's one of many options that the Board is considering, and we have to take it along with our expected 2021 budget in terms of the CapEx and the factors, exploration potential. There's a lot of factors in addition to the return of capital and the Board will ultimately make that decision, whether it's in the fourth quarter or in the first quarter of next year. I'm not sure, but that's in the Board's hands.
And your next question will come from James Young from West Family Investments.
For your EBITDA guidance for the full year of $100 million to $105 million, what are you assuming for commodity prices in the fourth quarter?
Jim, thanks for your question. We're assuming consensus prices for the fourth quarter.
And they are?
I don't have them at the top of my head. But roughly, you're looking at copper is around $3, zine at $1.10. Silver is around, I believe, $24 an ounce. Those are the main ones.
So it sounds like the assumptions that you're using are lower than the current prices in the market?
Right. Consensus typically -- they are -- there's usually a laggard in the consensus price. And every quarter, we've seen the consensus price move up to catch up to the -- to spot prices. But spot prices have increased so much over the last 6 months that, yes, the consensus has been a laggard due to spot prices.
And your next question will come from Leon Cooperman from Omega Advisors.
I have 6 questions. So let me just put a math there. And first, let me also congratulate you on your performance. The performance was quite excellent. I realize -- the question #1, I realize that to an important degree, mine life is a function of product prices. And -- but -- and running into people, I think the stock is extremely mispriced. But running into people's views, there seems to be a concern that the mine life is very short. At current price levels, what is the estimated mine life of that 3 mines? That'd be question #1. Question #2, do you have a plan for tonnes processed in 2021 versus 2020, assuming no mine shutdowns due to the virus? Third, if you could prioritize the use of your free cash flow? Fourth with the recent valuations that you've come out with and provided to the market, do you have an updated view of NAV? And then fifth, this question was just asked, but -- and I want to kind of elaborate a little bit more. On January 8, 2020, you announced the plan to return $30 million to shareholders that was shelved due to the virus. Prices, what you sell are higher, EBITDA is higher. The stock is up very little. And you mentioned about as a board consideration. When do you think we'll hear from the Board as to a decision? And finally, given the size of the company and illiquidity, we thought of maximizing shareholder value by a sale to a larger entity. So those 6 questions. Any help you could be would be much appreciated. And I congratulate you on a very strong performance.
Okay. Thank you, Lee. [ Best of my life ], we are -- as we speak, we're releasing our PEAs. In Mexico, in Bolivar, we are thinking about over 10 years. Bolivar, it should be also over 10 years and in -- according to current resources. And in Yauricocha, we're thinking about 8 years. Now having said that, that has been the interim. That's the story with underground mines that usually has a rather 8- to 10-year mine life that keeps -- it's a moving target because it doesn't make sense to keep drilling for more resources because then, like, since the value that you're planning to get in 10 or 15 years from now, you destroy it by spending the money now to keep recognizing that resource. So although we have this number of years, we certainly believe that the life of the mine is going to extend beyond those horizons. In terms of tonnage of 2021 versus 2020, well, we are expecting that Bolivar will reach the 5,000 tonnes per day on a constant basis, same thing with Cusi for 1,200. And the change would be in the Yauricocha. If we managed to get the permits to expand from the current 3,000 permitted to 3,600 permitted.
If you take that all together, would you expect to -- what order of magnitude increase in production would you expect in 2021 versus 2020? Just a rough idea?
Well, it would be 20% in Yauricocha, which is -- in terms of revenue, it's 60% of our revenue.
So 60% of your revenues would go up 20%?
Yes.
Got you. All right. That's very encouraging.
Yes. Now having said that, the profile of the grades will also change a bit. We might have a slightly lower grade. So all in all, we expect more revenue. But we are in the process of budgeting, I couldn't tell you what final number [indiscernible]. Well, in terms of the Board, I don't want to preempt the board Lee, on when and how they make the decision. So in terms of free cash flow, how we make use of the current free cash flow. So I'd rather leave it there. But certainly, I guess it's going to be on the agenda of the Board.
NAV?
NAV, we've just released the PEA for Bolivar, and we are planning to release the PEAs for Yauricocha and Cusi. So that will give you a sense of what we believe in terms of PEA, quality assessment, what we believe is the potential value of these 3 operations. In terms of selling to larger entity, well, I cannot comment on that, beyond saying that we certainly look at all the ways to increase value for our shareholders.
I didn't ask this question before, but I assume that you would be looking for a substantial increase in EBITDA in 2021 versus 2020, all things being equal, if prices stay here, et cetera?
Well, as compared with 2020, we expect an increase for sure.
At this time, this brings us to the end of our Q&A session. I'll turn the call back over to the presenters for closing remarks.
Thank you, operator. That concludes today's call. On behalf of the management team, I would like to thank the participants for joining us on today's call. A replay of the webcast and all materials can be found on our website at sierrametals.com. If there are any further questions or concerns, you may reach out to us any time after today's call. Our contact information can be found in today's presentation as well as on the company website. Thank you, operator. Please conclude the call.
Thank you, everyone. This will conclude today's conference call. You may now disconnect.